Structural Change: New firm creation higher in services sector

Indicating a change in India's economic structure and sector-wise contribution, the Economic Survey 2019-20 has said the creation of new firms in the services sector is "significantly" higher currently than in the manufacturing, infrastructure and agriculture sectors.

The survey tabled by Finance Minister Nirmala Sitharaman in Parliament on Friday said new firm creation has gone up since 2014. It shows that the growth is particularly pronounced for the services sector. "This fact reflects India's new economic structure, i.e. comparative advantage in the services sector," it said.

Referring to the World Bank's Data on Entrepreneurship, the survey said India ranks third in number of new firms created. While the number of new firms in the formal sector grew at a compounded annual growth rate of 3.8 per cent from 2006-2014, the growth rate from 2014 to 2018 has been 12.2 per cent, said the Economic Survey.

"As a result, from about 70,000 new firms created in 2014, the number has grown by about 80 per cent to about 1,24,000 new firms in 2018," it said.

The Survey also noted the fact that entrepreneurial activity is related to economic growth.

Suggesting measures to increase entrepreneurial activities in the country, the pre-Budget survey has said the government needs to focus on increasing the literacy rate and policies for ease of doing business. It also suggested that better connectivity of villages through tarred roads would improve access to local markets and improve entrepreneurial activity.

"Measures to increase the literacy levels rapidly through the institution of more schools and colleges will spur entrepreneurship and consequently local wealth creation," the survey said.

Literacy and education in the district level foster local entrepreneurship significantly as per the Economic Survey. It said the eastern part of India has the lowest literacy rate of about 59.6 per cent according to the census of 2011 and it is also the region in which new firm formation is the lowest.

It also advocated privatisation of education in line with privatisation of engineering colleges in the country for enhancement of education capacity.

"Following the successful contribution of privatisation of engineering colleges to India's software exports, governments could also explore the privatisation of education to augment education capacity at all levels of education."

The survey which reflects the economic health of the country said policies that foster ease of doing business and flexible labour regulation should be undertaken, especially in the manufacturing sector.

As the manufacturing sector has the potential to create the maximum jobs, states must focus on enabling ease of doing business and flexible labour regulation to foster job creation.

( With inputs from IANS )